AN OVERVIEW OF THE ORIGIN AND DEVELOPMENT OF THE SOUTH AFRICAN VAT

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The structure of the South African VAT and equity

a point of departure, the economic perspective of equity is considered. As discussed in the previous chapter, it is not the equity of a single tax that is of major importance, but rather the equity of the entire tax and transfer system. The canon of equity relates to taxes being collected according to ability to pay and from the work of Mirrlees (1971), the ability to pay is influenced by the transfer system. When considering the South African tax and transfer system, it is highly progressive (World Bank, 2014).
Although empirically estimated by the World Bank (2014), with only 5.5 million personal income taxpayers (from a population of approximately 55 million) and the income tax (with a progressive tax scale) providing more revenue than the VAT, little empirical estimation is required to conclude that the tax system is progressive.172 Moreover, with direct cash transfers, free basic services and education and health spending accounting for more than 40 percent of total government spending (World Bank, 2014) and being targeted towards predominantly the needy (that likely do not pay income taxes) it appears self-evident that the tax and transfer system is highly progressive. This means that from a purely theoretical equity perspective, increasing the regressivity of the VAT (or similarly decreasing the progressivity of the income tax), could better align the tax and transfer system with the ability of individuals to pay.173
This said, the burden distribution of the VAT is important for two major reasons. The first is that the increasing level of income inequality is a major challenge for South Africa (as discussed in Chapter 1). Increasing this level of income inequality by decreasing the progressivity of the tax system may provide for a more equitable tax system, but may also result in an increase in conflict, a reduction in economic growth, weakened social cohesion and security and a negative effect upon sustainable development (World Economic Forum, 2015).
The second reason is that a change in VAT policy may well only be legislated if it adheres to the dominant concern of politicians, namely acceptability (Farnham, 1990). Political acceptability is likely to be closely related to income inequality, since much of the power, especially in a democratic society (like South Africa), is held by needy individuals. The consent of these individuals is potentially a requirement of effective action (Farnham, 1990) and for South Africa, the level of income inequality suggests that a great percentage of individuals are needy.174 It may well be politically unacceptable for government to increase the regressivity of the VAT, unless perhaps this increase can be accompanied by a politically acceptable change in policy.

Data used in developing the base structure

For the purposes of developing the base structure, use was made of the 2010/2011 Income and Expenditure Survey of Households (IES 2010/2011) of South Africa. This survey was conducted by Statistics South Africa and used three data collection instruments; a household questionnaire, a weekly diary and a summary questionnaire (Statistics South Africa, 2012).
The household questionnaire consisted of four modules. The first module recorded a variety of demographic variables of each household. The second to fourth modules collected information upon different categories of expenditure covering education, health, dwellings and services, clothing, footwear, expenditure when away from home, domestic workers, furniture and equipment, transport, computer, telecommunications, finance and banking, as well as particulars of income (Statistics South Africa, 2012).
The weekly diary (completed for two weeks by each household) consisted of a booklet wherein households recorded their daily expenditures, where they incurred these expenditures and the purpose of the expenditure (e.g. own consumption or a gift). The summary questionnaire consisted of questions that were only used by the interviewer. The purpose of this questionnaire was to assign consumption according to purpose (COICOP) codes to the weekly diary expenditures of households, and to ensure accuracy and completeness of the diary (Statistics South Africa, 2012).
This survey was conducted over a period of one year, with each household being in the sample for a period of four weeks. The sampling frame was obtained from Statistics South Africa’s Master Sample, which provides a national coverage of all households in South Africa, excluding certain institutions (e.g. prisons). Although an initial sample of 33 420 households were identified, only 82.8 percent where in scope and of these households the overall response rate was 91.6 percent (Statistics South Africa, 2012).

CHAPTER 1: INTRODUCTION 
1.1 BACKGROUND
1.2 RESEARCH OBJECTIVES
1.3 LIMITATIONS OF THE STUDY
CHAPTER 2: THE STRUCTURE OF A GOOD VAT 
2.1 THE UNDERLYING FORM OF TAXATION
2.1.1 Taxation – the large pile of sand
2.1.1.1 Research in taxation
2.1.1.2 Economic bases of taxation
2.1.1.3 Types of taxes .
2.1.1.4 Canons of taxation
2.2 THE STRUCTURE OF A GOOD VA
2.2.1 The origin of the VAT
2.2.2 The development of the VAT
2.2.3 The structure of a good VAT
2.2.3.1 The main aim of the VAT ought to be revenue .
2.2.3.2 Tax consumption, not production .
2.2.3.3 Apply to the broadest base possible
2.2.3.4 Apply a single non-zero rate
2.2.3.5 Use the invoice credit method and the accrual basis .
2.2.3.6 The structure of a good VAT and equity
2.3 CONCLUSION
CHAPTER 3: THE SOUTH AFRICAN VAT
3.1 THE ROLE OF VAT IN THE SOUTH AFRICAN TAX SYSTEM
3.2 AN OVERVIEW OF THE ORIGIN AND DEVELOPMENT OF THE SOUTH AFRICAN VAT
3.3 THE SOUTH AFRICAN VAT STRUCTURE AND THE STRUCTURE OF A GOOD VAT
3.3.1 Revenue performance of the South African VAT
3.3.1.1 VAT revenue and the main sources of VAT revenue
3.3.1.2 The efficiency, C-efficiency and buoyancy of the South African VAT .
3.3.2 The South African VAT registration threshold
3.3.3 The South African VAT base
3.4 THE STRUCTURE OF THE SOUTH AFRICAN VAT AND EQUITY
3.5 CONCLUSIONS
CHAPTER 4: METHODOLOGY 
4.1 DEVELOPMENT OF THE BASE STRUCTURE OF SAVATMOD
4.1.1 Data used in developing the base structure .
4.1.2 Restructuring of the IES 2010/2011 for the purposes of the base structure of SAVATMOD
4.1.3 Incorporating VAT policy into the base model
4.1.4 Running the base structure of SAVATMOD .
4.2 THE ESTIMATION AND INCORPORATION OF DEMAND BEHAVIOUR FOR EACH HOUSEHOLD
4.2.1 Consumer demand theory
4.2.1.1 Budget constraints and demand functions .
4.2.1.2 Preference relations and utility functions
4.2.1.3 Utility maximization and expenditure minimization.
4.2.2 Data required for the estimation of the demand systems.
4.2.3 The calculation of prices of the demand systems’ categories and groups
4.2.4 The grouping of goods in forming the expenditure categories and nutritional goods groups
4.2.5 The estimation of the two demand systems
4.2.5.1 The AIDS and QUAIDS Model
4.2.5.2 Results pertaining to the complete demand system
4.2.5.3 Results pertaining to the nutritional goods demand system .
4.2.6 Incorporating the calculated elasticities into SAVATMOD
4.2.7 Changing the VAT rate and consequently prices in SAVATMOD
4.2.8 Changing the total expenditure for each household in SAVATMOD .
4.3 AN ILLUSTRATIVE EXAMPLE OF THE WORKINGS OF SAVATMOD .
4.4 CONCLUSION
CHAPTER 5: AN ANALYSIS OF AN INCREASE OF THE VAT RATE 
CHAPTER 6: AN ANALYSIS OF STANDARD RATING BASIC FOODSTUFFS 
CHAPTER 7: CONCLUSION

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A QUANTITATIVE MEASUREMENT OF POLICY OPTIONS TO INFORM VALUE-ADDED TAX REFORM IN SOUTH AFRICA